INHERITANCE TAX

In his pre-budget report on the 9th October 2007 the Chancellor Alistair Darling responded to political pressure and announced changes to Inheritance Tax (IHT).

The major change comes with the introduction of the 'transferable nil-rate band' which benefits married couples, civil partners, widows and widowers but not single people or cohabiting couples.

The IHT spouse exemption means that there is no IHT to pay on assets passing between married couples or civil partners. Before the changes this meant that if one spouse or civil partner died and left everything to the survivor then no IHT would be payable on the first death. However, as a result of this the deceased's nil-rate band was unused and therefore lost. The family as a direct consequence could have faced an additional £120,000 in IHT on the death of the survivor.

To overcome these difficulties, many people followed best practice advice and completed Wills whereby, on the first death, assets of a value equal to the nil-rate band were left directly to the children or more commonly to a discretionary trust. This ensured the nil-rate band was used fully and not wasted.

Following the Chancellor's announcement it is now possible for married couples or civil partners to use both nil-rate bands on the death of the survivor. This is achieved by a transfer of any part of the nil-rate band allowance which was not used on the first death. It does not matter when the first death occurred as the announcement had retrospective effect, so long as the second death happens on or after 9th October 2007.

In many cases the availability of the transferable nil-rate band means it will no longer be necessary to write complex arrangements into Wills involving discretionary trusts, IOU schemes or equitable charges. The provisions will be a welcome simplification of the IHT regime for clients.

This change will effectively provide a £650,000* nil-rate band to all couples (married or civil partners) rather than only those who have executed some IHT planning steps.

*based on nil-rate band of £325,000 for tax year 2009/2010

Is it necessary to change existing Wills?

Many clients will already have nil-rate band or discretionary trust arrangements written into their Wills. There is no need for clients to change their Wills simply to exclude such arrangements. The existing trust should include a power to distribute capital at any time. The trustees could use this power on the first death to appoint the trust assets to the surviving spouse. Provided this is done within two years of the first death, both nil-rate bands will be available to use on the death of the survivor. Clients may choose to leave their Wills unchanged until they next review them but if this has not been done for some years, now might be a good time to do so.

New Wills

There will still be instances in which a nil-rate band discretionary trust is useful but it is now unlikely to be for IHT reasons.

Instead couples may prefer to return to the much simpler 'all to each other and then to the children in equal shares' provision in their Wills.

Nil-rate band

The IHT nil-rate band in the tax year:

From 6/4/2007 to 5/4/2008 £300,000

From 6/4/2008 to 5/4/2009 £312,000

From 6/4/2009 to 5/4/2010 £325,000

Further advice

If you would like more detailed advice or wish to discuss the most appropriate actions for your particular circumstances then contact a member of our Probate team. More information can be found by following the link to the HMRC website.

Contact:

John Palmer
Email johnp@claytonmott.co.uk

The information and opinions contained herein are for general guidance only and not intended to constitute legal or professional advice. The information should not be relied upon or treated as a substitute for specific advice relevant to individual circumstances. Clayton Mott shall have no responsibility for any loss that may arise out of reliance on any material contained herein.